by Alyssa Oursler | January 28, 2013 9:02 am
We’ve all seen them. Heck, I’ve even written about them: simple steps to get started in the market; math problems about the money you should be saving and the returns you could be missing; tips and tricks about diversification and dividends.
All that information is well and good.
But recently, I’ve come across some other refreshing pieces of advice hidden in various corners of the financial blogosphere and found them compelling, especially for young investors. These aren’t steps to success or rules for retirement, but some big-picture pieces of wisdom that often get lost in the details:
Carl Richards wrote in The New York Times, “When you make a decision to avoid one type of risk, you might be exposing yourself to another one.” This isn’t just true when it comes to picking stocks or sectors to invest in, but for the idea of investing as a whole.
Countless recent grads shy away from the stock market because they see it as a gamble. But while they’re busy being “very concerned about the risk of holding stocks,” they “overlook the risk that comes with holding too little in stocks — which can help you keep up with inflation.”
It’s a common cliché that the biggest risks are often the ones you don’t take, but a better lesson is simply that you face risk no matter what you do. Don’t fool yourself into thinking you’re avoiding it, whether through some fancy investment strategy or by not investing at all.
I know, I know. Everyone talks about beating the market. But to quote every mom everywhere: If everyone jumped off a bridge, would you jump off a bridge too?
Seriously, though, the exercise of trying to beat the market is detrimental to retail investors. As financial blogger Josh Brown wrote a few weeks ago, “Prior to comparing your returns to this or that index and then tearing out your hair over them, ask yourself whether or not it should matter. If you are anyone else besides a professional trader or fund manager, (beating the market) will not help you and can possibly drive you mad.”
The real thing that matters is whether your investment strategy is paying off in whatever ways you want or need it to. When you’re investing, you’re better off, “Asking yourself the correct questions, the ones with answers that are actually relevant to you.”
There are plenty of decent tips out there for saving money and investing it, but their importance or effectiveness shouldn’t be overexaggerated — which it often is. Yes, you should manage your student loans smartly, and sure, it’s a good goal to stop spending on overpriced cappuccinos and park that money into a mutual fund instead.
But, as Felix Salmon wrote, countless suggestions come with mind-set that if you “just cut out a daily latte habit, the next thing you know, you’ll be a millionaire!” That sends “a message that you can fix these things on your own, and somehow, magically, become fabulously wealthy — or at least financially independent — even without earning more money.”
He goes onto add, though, that “people on modest incomes don’t, in reality, become rich through saving.” In the end, the best way to earn more money, quite simply, is to make more money … not necessarily to spend less or invest smarter.
Salmon also goes on to point out that “saving is a means of delayed gratification.” And, without getting overly philosophical, delaying your gratification can mean sometimes mean delaying your life.
While it’s easy to take the costs of just about anything — nights out on the town, your favorite hobby — and work your way through an equation that makes it seem worth less than what you could have if you invest it properly, such exercises oversimplify the idea of value. Sometimes, good old-fashioned fun today is worth the bite it takes out of tomorrow’s finances.
Find a middle ground between having enough money to save, invest and spend later and between enjoying some of the money you have now. There’s no point in hoarding every last penny if it means you’re sitting in your room miserable most nights or if you then feel guilty when you do occasionally drop some dough.
In the end, you’re going to spend all your money one way or another, whether it’s now or in 20 years. Make sure you enjoy it along the way.
Source URL: http://investorplace.com/2013/01/under-preached-advice-for-young-investors/
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