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1) Your goals should dictate how much you need to get started with investing in the stock market, or anything for that matter.
When I first started trading in the stock market I was about 18 years old and I started with $500. My goal was to make only $50.00 in a week, which basically equated to a 10% return, so that I did not have to work on Saturdays at my job. If I wanted an entire month of Saturdays off then I would have to make 10% four times in a month. I had no concept of either how easy or how difficult it would be to make this $50 (or 10%), I just knew I needed to make it to reach my goal.
Write down specifically how much money you need and why, what you want to buy with it, and what that money is going to do for you. Get crystal clear about your goals.
2) Determine which investment vehicle and strategy you are going to use to get you there.
Decide on your investment vehicle, for example is the vehichle going to be the stock market, real estate, a franchise? Do some research on what a realistic rate of return is for that area of investing. For me 10% was realistic because all I had to do was buy 100 shares of a $5 stock that moved 50 cents. I had seen stocks under $5 move 50 cents before but I had to figure out how I could capture my 50 cents of profits from it. If you choose real estate then the numbers are going to be different, you may need $50,000 to make $5,000 if a 10% return is your goal. What I love about the stock market is that I can make that 50 cents in one day or one week. With real estate it may take you several months to find a house, fix it, then sell it. So this leads me to my third point.
Write down the different investment vehicles that interest you. Research the type of returns that can be expected from the list and start the journey of learning what it takes to be successful in that industry.
3) Have a Realistic Time Frame
If you are in the investment vehicle of buying and selling stocks, you could do it by day trading, weekly trading, monthly trading or even yearly trading. You should have a realistic time frame to go with the investment vehicle you choose.
So let’s talk about the next factor you should consider with respect to time frame, and that is the knowledge you have and the information that’s available. You may have to take a beginners’ course like Foundations of Stock Market Trading. Give yourself time to fully understand and practice applying the new information; learn to crawl before you walk.
So many times when we begin on a new venture or embark on a new journey to change our lives, we often forget to factor in time for “the learning curve.” Think about it like this- if I ask you why do you want to be a doctor, an engineer in the car industry or a lawyer, you may answer with “I love helping people, I love working on cars or I love debating events.” At the end of it all you would also most likely say “Oh and I hear they make a lot of money.” When asked what would you have to do to become that lawyer, doctor or engineer without hesitation you would probably say “Go to school for 4 years in undergrad, then I would have to do another 4 years of law school, or 10 years of med school, then do 2 years of residency…” do you get where I’m going with this?
Why is it that when it comes to investing in the stock market, people don’t prepare for a commitment of 4 – 10 years? Most individuals give this industry 2 or 3 months and if they are not rich by then, they assume it doesn’t work.
Let me ask you this- do you know anyone that has failed a college course? The school didn’t offer to refund them money because it didn’t work. I am willing to bet that if you are someone with a college degree today who failed or dropped a class during school, you didn’t say “This didn’t work” even though you technically lost money on that class. You registered for the class again and realized you would pass on a second attempt if you study harder, not hang out as much, go to bed late with your books, wake up a little earlier with your head in your books. You knew that someday you would graduate if you kept applying yourself. Colleges are not just giving out MBAs, you have to earn one. It’s the same in the stock market- you want an MBA from the stock market, which by the way stands for “Major Bank Account” in our industry, you have to earn it.
So the point is you have to factor in the time to learn the game and learn the industry before you even account for the time it will take to gain profits. If you want to make a million dollars in 5 years, it may take you 2 years to fully understand how this all works and you should therefore commit to 7 years of mastering this craft. You may say “well, that sounds hard…” to me, retiring broke, dependant on the federal government or working 40 years for someone else who dictates my lifestyle sounds hard.
Determine what’s a realistic time frame to to reach your financial goals. Keep in mind the investment vehicle you have chosen as well as time for the learning and practicing the craft on your way to your first profits.
4) Consider how much you are willing to risk.
This is an important one. Just because you determine you need $10,000 to get started does not necessarily mean you should take it from your retirement fund, your kids’ college tuition, or the money you and your spouse put away to buy a new house.
You have to consider Newton’s Law and that is “anything that can go wrong, will.” Consider the time frame may take longer than you initially expected and plan for making less than your ideal perfect percentage return on investment.
Think of it like baseball, no one steps up to the plate and hits a homerun every time. You have to be prepared for curve balls, foul balls, and strike outs, as well as possibly losing the entire game. These all are scenarios you should factor in when determining how much you are willing to risk.
Here are 5 key questions to ask yourself
- Am I putting my family’s safety and security at risk?
- Will I still be able to afford a roof over my head if this goes completely wrong?
- Will I still be able to put food on the table for my family or myself?
- Will the stress of this investment impact my relationship with God, my family, my co-workers, etc?
- Will I have to do something unethical to either come up with the money or replace the money if lost?
Be totally honest with yourself when going through this exercise and you will come up with the number you need in order to start investing. That number is going to be different for me than it is for you, than it is for the next person who reads this post. The most important thing you can take away from this is to have your number, have a vehicle, and have a time frame in sight because as my mentor once told me “How can you hit a target that you can’t see?”