Taking the Plunge: How and Why

So now that you have some sort of a cash cushion, this blog post and the ones that follow will strictly emphasize the importance of investing a % of your savings, analyzing a business before putting money down, and thinking bigger and smarter about the investments you make. 

Taking the first steps:

If you’ve reached the decision to invest and are asking yourself that you’re ready to take the plunge but don’t know how- here are some of the most important things one should focus on and it all starts with this first step- your mindset. Whichever mindset you have is solely yours and no one can take that away- so if you’ve reached this far in the investing ballgame, you’re doing fantastic, so keep it up! I view mindset as being two things: 1) Attitude 2) Self-awareness. Like life, you should approach investing with healthy skepticism while staying positive/invested (no pun intended) for the long term. Self-awareness is going to come down to two things 1) Being comfortable with being uncomfortable- meaning that you must be prepared to lose 100% of the money you invest in an individual stock in the event the company goes under. Be prepared to embrace volatility- times when the market is experiencing a significant correction or even a bear market. Investing in the market is like life- it rises and falls, but with the right attitude, a bit of luck, strategy, and mindset, the long term trajectory is always positive. 2) Always keep your feet on the ground- before you decide to invest, it’s important to have a goal in mind as to the type of investor you want to be so you don’t lost sight of what matters most to you. For example, determine whether you’re invested for the long term and purely seeking growth, value, or income over the course of your life or are you purely a short-term investor (1-5 years) and looking to taking profits and growth off the table when you’ve determined sufficient income has been created from a particular investment or two and then subsequently reinvest those profits into more investments. What I wish i knew when I first started investing is that there is a fine line between gambling and investing. Gambling is rolling the die and hoping it lands in your favor without doing zero research, no underlying value assigned to it, and pure luck. 

My first two companies I ever invested in were bought purely on speculation and hype and not to anyone’s surprise, they are no longer in my portfolio, as I became comfortable with taking the steep loss due to the tax benefit (you can deduct up to $3000 of capital losses in a year) and carry forward any excess losses indefinitely. More importantly, I saw the business going nowhere at least for the short term. I wanted the liquidity to invest into companies that actually paid me dividends quarterly and hence I took comfort in taking the loss even though psychologically, humans don’t wish to take losses. I learned that it wasn’t worth my time trying to stress over hyped up companies that paid me no dividends and it was money that I could afford to lose at the time. On CNBC’s Shark Tank, Kevin O’Leary once stated “Here’s how I think of my money: soldiers- I send them out to war every day and at the end of the day, I want them to come home, so there’s more of them”. Every soldier will die if you invest in a company without knowing the risks and not having a good understanding of the business. On that same note, a wise and shrewd investor will think of his portfolio as if he/she is running a business. In the case of owning stocks/mutual funds/index funds, although you are owning a highly insignificant % of the company, the question one should ask before putting money into stocks or various funds is: does this business have the ability to sustain profits over the long term? The short term story may be fine and dandy but there are no guarantees. Like life, the market isn’t always kind and you must always be prepared for a downturn. 

A few indicators in a company portray to the wise investor that the business has what it takes to experience any bloodbath that happens on Wall Street. In my opinion, here are some good indicators that a company has the ability to generate value in troubling times and recover from any windfalls the market is bound to throw at you: 1) Multiple revenue streams- the business has various segments in which it makes money and delivers value. Even if one segment suffers significantly, there are  other segments on the table strong enough to offset declines in the others. 2) Ability to pay dividends- if the company has successfully paid out dividends in times of economic declines and is know to be a “dividend aristocrat” (strong history of consistent increases in dividends in last few decades), then you know that shareholders are taken care of. Many other indicators exist when investing for the long term, which i’ll get into on a separate blog post.

Always remember that present success is no indicator of future outcomes, however, you are essentially betting on the company’s sustainability of profits- the most important thing that matters. Although investments aren’t guaranteed to make you money in the short term- if you do your research (which i’ll address how in a separate post) and know the underlying bread and butter of the business, understand management goals, you surely have a better shot at growing wealth over the long term as opposed to blind luck (like the lottery)

The How: Once you’ve determined your mindset and the type of investor you want to be, let’s figure out how you can invest. There’s no easy answer and I strongly suggest to keep things very simple: 1) Open a brokerage account (various online brokerages like Fidelity, ETrade, Scottrade etc. The brokerage accounts come at a cost- starting at about $4.95 every time you place a trade, depending on which one you decide to go with. I suggest going with this option if you want the ability to reinvest dividends. 2) Robinhood- your go-to platform which has its own pros and cons. Biggest advantage to using Robinhood is zero trading costs- no commissions. The disadvantage to Robinhood is that it currently does not allow for dividend re-investing at this time (and i’ll get in to what that is in later posts). With both platforms, all you literally have to do to start investing is link up your bank account so you can transfer money into your brokerage. Once accounts are linked, you’re ready to transfer some money into your brokerage and voila… you’ve passed the first stage. Consider your investment objectives when choosing your platform. If you’re like myself, I generally use an online brokerage as well as Robinhood. I’d suggest that for the time being, utilize an online brokerage to fund your individual retirement account (also to be discussed on another blog post) as you’ll have the ability to reinvest dividends and see your investment grow at a faster rate. As mentioned before, expect short-term volatility if you happen to purchase an investment at the peak of a bull market (a period of a rising bull market). A bear market is a period of downturn in a stock market where a major stock index (Dow Jones Industrial Average) suffers a 20% or more decline. I cannot stress dividend reinvesting enough.. hence, you will hear me mention it on a lot of future blog posts as it is essentially your money growing on autopilot. 

The Why: As you’re setting up your brokerage and about to purchase your investment.. you ask yourself, what if I suffer a loss? You then make excuses and say, I need to stay liquid and save for an upcoming big purchase, or you need to buy the next iPhone etc. In my opinion, there is no excuse to not save and invest for the long term. Yes most working professionals will not take the time to research- which is understandable. If that is your situation, I’d suggest to have someone manage your investments for you; even if it means you have to pay a fee each year. If you can dedicate some time to it and would be open to learning- do a bit of research on index funds (the simplest form of investing in my opinion). By investing in low cost index funds, ETFs, and the like, you avoid substantial transaction costs and also save yourself the annual fee you’d like pay to your money manager.

Time is the most important commodity in life and how we use it likely determines our trajectory. When it comes to investments, the earlier you start (mid-twenties is recommended) the better. Each year that you miss an opportunity to participate in the market, you lose out on potential success stories you could’ve been a part of. The same goes about my philosophy of the famous saying in the investing world “buy when there is blood on the streets”. Again, I keep using life as an analogy but it’s true don’t you think? As worse as things may seem at times, there are countless opportunities on the horizon when things can’t seem to get any better. Eventually, with the right mindset, choices, and willpower, things for most people get better and life goes on. Similarly in markets, when investors are pessimistic, the wise investor has cash ready to put to work in a solid company and generate substantial profits when the market recovers. Take some chaotic events in the past for example: Brexit (ongoing), 9/11 attacks, 2008 financial crisis, and China’s devaluation of it’s own currency; just to name a few. If you look at the timeline of each of these events and see the few months or a year or two (in the case of the financial crisis) that followed, you will notice that the market recovered each time and even reached new highs in some cases. Please note that i’m not suggesting that this is a foolproof system. There is a high chance that if a major catalyst in the world economy was to bring markets into a significant downturn, you will likely suffer significant losses and be unable to recoup them for quite some time (i’ve been there). However, what differentiates the wise investor from the one that panics, is patience & the willingness to keep moving forward through the turmoil in financial markets.

For some parting words, knowing your investment horizon/timeline is essential for success. More Americans are working longer than ever before- however, the amount of savings for the average baby boomer in this country is dismal. To keep up with the pace of inflation (a time of rising prices), use time to your advantage, and use every method available at your disposal to put money to work- whether its an employee sponsored retirement plan (401k or a 403b for the non-profit/health care folks), a personal portfolio through a brokerage, or Robinhood. As discussed, strong “dividend aristocrat” companies with a proven business model have a higher likelihood of riding out recessions and any short term volatility in general. Of course, in times of fear and pessimism, no investment is safe and you are guaranteed to see declines in your portfolio. I would encourage all to plant the seeds early to see the tree grow over time. From my experience, the journey is more worth it than the result it because of the countless experiences you’ll learn from when it comes to managing your wealth. I would encourage all to be financially free as opposed to “wanting to be wealthy/rich”. With financial freedom, you can do all those things anyway and you will surely have nothing to worry about if you play your cards right. The big difference is this: Do you wish to work well into your senior years having a job you’re miserable doing but are earning well or do you wish to do something where YOU are in control and satisfied with your overall well being. If you’re like me, one day, I would like no restrictions on my daily routine because I wish to work solo on my own one day; whether it’s having my own business or simply just have the freedom to do what I want to make an impact without being told what to do by an employer. Of course, our thought process and goals continue to change as the years progress, so by no means am I saying that this is the only way to success and financial freedom. It’s simply all about mindset.

Time is money, so use your time wisely.

Disclaimer: This blog and the information contained herein is not a platform for guaranteed success on investments. The views expressed are my own and I strongly suggest to do your own research prior to making any decision. Because the information on this blog is based on my personal opinion and experience, it should not be considered professional financial advice. The blog is a discussion forum and not a website for access to financial data. I have no access to material non-public information nor any discrete information on publicly traded companies in general.


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