Emotions take precidence in most of the decisions we make about our disposable income.
We want something, we like something, it sounds good or looks good.
Some play money is alright but what about investing?
Do you use the same behaviors when deciding to invest?
We need to invest like Spock
Deciding how, where, and why to invest should not be taken lightly. We need to think logically and look at the data, the facts. Spock from Star Trek is a great example of how to approach investing wisely. He didn’t let emotions get into the way of making the right decision and he didn’t care how others felt about the choices he made. They were based on facts.
There are three things to think about when starting to invest
I am not a Financial Planner and don’t know much about specific investments. But I do consider these three easy to understand things before investing a dollar into anything.
What is the purpose of the money? Don’t just put in the market for the sake of being in the market. You must give the money a purpose. Examples: Retirement, a second home, kid’s college
How long before you need to take out the money? Investing is a great way to get a good rate of return when saving money for more than 5 years.
Listen to me explain how my risk tolerance increases (meaning I was willing to take more risk) when first riding roller coasters. You must know how much you are willing to risk before boarding because once you are on, you are on. You also don’t want to jump off too soon. If your risk tolerance is low then you probably want to start with the kiddie Dragon coaster.
Don’t let the media scare you from the market
The media is trying to get your eyeballs. If it bleeds it leads. The weather isn’t mostly sunny, it’s partly cloudy with a chance of storms on Thursday. You gotta watch that, right? The same is when the stock market drops. You hear more headlines about the bad economy than success stories of the good stuff.
Spock would evaluate the data, and here it is
Download this spreadsheet and follow along: S&P500 trends Excel
The S&P500 lost 8% or more twenty times in the past 100 years. But it GAINED more than 12% fifty times! Did you hear that? It gained more years than it lost!
When we take into account multiple year, evening out the waves, we can plainly see that the S&P NEVER LOST MONEY when looking at an average of 5+ years. In fact, the trends average more than 8% or more 91 times out of 100. Granted, these are not inflation-adjusted numbers but you are more likely to win than loose over the long haul.
Not so scary anymore, huh?
Investing is part of anybody’s moneyplan after getting out of debt. Once you fully realize this and see how compound interest and re-invested dividends work you should feel more comfortable in creating a portfolio of investments. When you have a purpose for your extra money, a timeline before you need it, and understand your risk tolerance level you will be able to look at the data and make smart decisions, just like Spock.
Also in the show: Holla from the Impala
Top 5 ways you know you are a sold-out Dave Ramsey fan
Join me on leap-year day!
I’m going back to Cali! Come join me at Lucille’s in Cerritos, CA on the evening of February 29, 2012. We’ll get some BBQ and hang out in the bar area for a while. Right now I am planning on 7pm but this could change (depending on traffic – yikes!)
Lucilles in Cerritos is located at 11338 South St and their phone number is 562-916-7427