Step 1 of 12 to get started investing

Get the Right Mindset

     So, what is the right mindset to start investing? Well, before I answer that I will give two incorrect, but popular mindset options.  1) Complete pessimism.  This one sounds like this, "Don't invest in the market unless you are ready and able to lose everything you invested".  Whoa, hold on a second.  While it is possible to lose everything when investing in the stock market, I believe this mindset to be too extreme.  If you plan on losing everything you probably will not ever get started, and if you do, you will be too cautious to actually make any money. 
     2) Complete optimism is the other popular mindset.  This one goes like this, "I'll invest in some high risk stuff, buy low, sell high, and make a killing in no time."  Also problematic because while this is possible, its likelihood is similar to winning the lottery.  
     Neither of these individually is the correct mindset, but I believe a combination of them does lead to the correct one, which I will call - Cautious Optimism.  With Cautious Optimism you can mentally understand that you can lose everything that you invested, but realize that this is highly unlikely unless a global market collapse occurs.  With proper diversification your investments should cover a wide range of sectors and countries which will hopefully keep you from big losses. 
     While understanding the possible downside, Cautious Optimism also allows you to plan on making money in the market (otherwise what is the point?) but realize that it will be a slow process. Overnight riches are rare in the market, but long term success is extremely common.  Knowing that it will probably be a long bumpy ride to financial freedom will allow you to not worry about daily fluctuations and stay focused on the overall picture.

Step 2 of 12 to get started investing

Overcoming Fear
    
     Last month I wrote about getting the right mindset to invest by adopting a "cautious optimistic" approach.  In explaining that mindset, "complete pessimism" was given as an incorrect alternative.  This month's newsletter will delve into that a little more.  

"I would like to invest but I don't want to lose money!"

     That idea is one of the biggest concerns that keep people from investing like they should.  At Positive Returns we obviously do not think that should hold anyone back.  "Why not", you ask?  Because if you do not invest your money, its purchasing power will decrease over time because of inflation.  In other words, if you do not invest, you are guaranteed to lose money.  I often avoid materialism, but in some ways just buying stuff is better than letting your money sit in an account that is earning you less than inflation is taking from you.  Here is a quick scenario to clarify.  
     Bob gets a $10,000 dollar bonus at the beginning of 2008.  He decides to save it in his savings account (1% interest annually) to go on a huge vacation at the end of the year that currently costs exactly $10,000.  During the year gas prices go up 10% and the food and lodging at his exotic destination also go up 10% (not impossible).  So the end of 2008 comes and Bob takes his money out of the bank which is now $10,100 because of the interest he earned during the year.  Is that enough for the trip?  Not anymore it isn't.  The same exact trip costs $11,000 because of inflation.  Bob will have to cough up some extra dough for the exact same trip he could have paid for earlier.  By letting his money sit in a bank Bob lost $900 in purchasing power without anything to show for it.  

So in order to overcome a fear of investing one must adequately understand the risks of not investing.

You lose money by not investing, but do you make money by investing?

The absolute answer is - it depends.

     First off, are you going to lose all of your money?  Almost impossible.  The largest one day drop in stock market history was 22.6% on Black Monday, Oct 19th, 1987.  Would a drop like that hurt?  Without a doubt, but that would not wipe you out.  If you are invested in great companies and ETFs, the pain would be even less.  On the flip side, can you make money in the market?  If you invested in Google in early 2004 you would have already increased your money by over 400%.  I would answer that question with a resounding, "yes"!  You can lose some, but you can make a whole lot more.