5 Things to Do Before You Begin to Invest

• Author: Jeffrey Simmons
• Posted: 2024-05-30

Spending time in investment chat rooms and Facebook groups lead to the inevitable conclusion that many people who are putting their money into the stock market are not emotionally ready to invest. They either have bad habits or unrealistic expectations that will doom them before they even begin. Before you invest any of your money, you should do an inventory of your personal attributes to see if you are well-suited to investing. Otherwise, you may be throwing away your hard-earned money in the name of trying to grow your nest egg. Here are five things that you need to do before you invest.

Temper Your Expectations

The problem with many investors is that they expect to hit a home run every time they step up to the plate. Singles and doubles are not good enough for them. Instead, they expect every single investment to be the next Amazon or Apple. This is a colossal mistake because it leads people to take unnecessary risks with their money. It can cause them to take too much risk in the name of chasing profits. Safe and steady investments are also beneficial for your portfolio and long-term financial goals. Starting investing with the expectation of instant riches is not what it is all about. Think of investing as a means of obtaining long-term financial success as opposed to immediate wealth.

Know How to Deal with Losses

It is inevitable that some of your investments will not be winners. However, people instinctively panic when they see themselves in the red on any trade. Many times, we see people in a complete tizzy because their stock is dropping without any idea of how to handle the situation. Then, they begin to poll their family and friends as to whether to should sell their stock or double down. Investors need to remain calm even when things are not moving their way. Before you begin to invest, you should consider your tolerance for pain and losses and how you will react if your position moves against you.

Learn How to Think Independently

Investment advice can come in a number of different forms from many people. The key is to be able to filter out helpful nuggets from noise and to learn how to make your own decisions. Outsourcing your investment decisions by polling the public just puts you in a position where you are at the mercy of external forces in your investing. Being a smart investor means that you are capable of making your own decisions after reading various sources. The ultimate decision whether to invest and for how long to hold a stock is yours. Learning about stocks by getting "hot tips" means that you may never become a smart and skilled investor. Even if you get a tip from your favorite uncle, you still need to do your own homework to run the idea to ground. Groupthink when it comes to investing is a recipe for disaster in the long run.

Find Money that You Can Afford to Lose

You should not be investing your entire life savings in the stock market. While the long term goal of investing is to build your financial nest egg, know that there is a possibility that your trades may not be successful. If you have money put away for things such as a critical auto repair or medical procedure, you should not be trading that money in the stock market. You are investing your savings with the knowledge that things could move against you. Of course, you should not go into investing with the thought that you could lose everything, but it is the worst-case scenario that you need to consider.

Know What Your Long-Term Plan Is

Investing is not something that should be done at the drop of a hat or on the spur of the moment. You need to know where you see yourself years into the future because investing is a part of your long-term financial plan. You should understand where each money move that you make fits your short and long-term financial goals as opposed to throwing a little bit of money here and there. Before you start to put your money into the market, you need to game out what you think your financial future is. Then, you should plot out various assumptions based on certain returns on investment making sure to remain realistic in your expectations.