Join Jane Barratt for an in-depth discussion in this video Building money muscles, part of Personal Investing Basics.
- Just like when you exercise your regular muscles, your money muscles can be strengthen over time with practice and training. First, your money muscles are just an analogy for your risk tolerance. But risk tolerance sound so inaccesible, we're going to stick with muscles. Think of when you went to the gym or went for a run for the first time in a long time. You feel fine until the next day when everything hurts. The pain comes from the tiny tears in your muscles as they repair themselves and gets stronger. Investing doesn't necessarily cause physical pain, but the very act of using your money muscles and making decisions for yourself, helps build your money muscles and your risk tolerance.
One of the hardest things with investing is taking your first steps. I've been investing for 17 years and as I remember it, the scariest investment was my first $1000 in. And my biggest high, was doubling that 1000 to 2000. Over time I learned what it felt like to have small gains and big gains. As well as small losses and big losses. I learned that the pleasure of my bigger gains is stronger than the pain of my bigger losses, which means that I'm open to risk. You can only build your money muscles over time by learning what that feels like to you.
Some of the best investors I know started out very risk averse, even saying they prefer to keep their money in their mattresses. But learn that they could get over their risk aversion by making small investments or even virtual ones, with the understanding that they had to be okay with it all going away. Now, it's rare to completely lose your money with investing, unless you buy high and sell low. So seeing that one week your $1000 is worth 1200, and the next week it's worth 900, you start to realize that unless you're in the lowest risk fixed income products like bonds, your holdings will fluctuate.
But the key is that over time, an amazing thing happens. Your investments will change in value but your ability to tolerate those swings is your money muscles at work. So, what are a few questions that you can ask people to help speed up your process? Learning about investing can be done anywhere. You never know who can help. So first, if you're talking to someone that seems knowledgeable, ask them if they invest other people's money for a living, or did they invest their own money, or do they have someone do it for them.
Those three categories of people will have very different points of view. Some that should be taken with a grain of salt if you're trying to build your own money muscles. If it's a professional, you have the opportunity to ask big strategic questions, but remember there's no future facts. No one really knows what's going to happen in the market even if they act like they do. So a start there. Ask in all your years of investing, how does this year compare and what do you think is going to happen next year? And then ask, what do your clients expect of you in terms of returns? And what's the last thing they bought with their own money and what is something that they're thinking of buying for themselves? If a non-finance person invests their own money, you'll be getting a great view of that person's risk tolerance and investment strategy.
Ask them how they got started. What was their best and worst moment as an investor? What's their point of view on the market right now? And what are they interested in buying or selling next? Last, if a person has someone invest on their behalf, ask how their portfolio performs, net of fees versus the market. Ask them how much they pay and if they are happy with the cost versus returns of outsourcing. And ask what is the best piece of advice their broker or advisor has given them.
By asking the right questions to the right people, you can accelerate your learning, understand your risk tolerance and build your money muscles over time.
Jane is the founder of GoldBean, an online investing platform that helps first-time and experienced investors alike take their investments into their own hands. In this course, she shares her investment strategies with you. She breaks down the market into its five basic building blocks—cash and equivalents, stocks, bonds, funds, and insurance products—and the different vehicles where you can invest these building blocks. She also covers topics such as the importance of a balanced portfolio, understanding and managing your risk, identifying value in the market, and building your "money muscles" over time. Plus, learn how to calculate the rate of return of a portfolio vs. general market performance. Last, Jane outlines the options for DIY investing, when it makes sense to work with an advisor, and how to avoid costly investment fees.
- Why should you invest?
- Understanding compound interest
- Comparing stocks, bonds, and funds
- Managing risk
- Building a portfolio
- Finding where to invest money
- Working with a financial advisor