For the longest time, people have tried to get a handle on the stock market. Day traders spend all day watching stocks, buying and selling constantly to try to get the best short-term return. People spend hours each day researching what’s hot and what’s not and then write all about it so that other people can spend hours reading it and feeling like they’re on the cusp of something great.
Then there are some who claim to have figured out the market. They boast amazing returns and convince other people to invest with them. These people are called liars. They usually end up in jail a la Mssrs. Ponzi and Madoff. But why are they so successful? After all we know about scammers, why do people still give these people their money? Because most people have an innate desire to get rich quick, and the stock market can offer that opportunity if you time it right.
The stock market is an exciting thing, but outside of my retirement accounts, I’ve never actually invested in individual stocks directly. I did a virtual stock exchange for an Investments class when I was in college, and put in a ton of time studying different stocks and making sure I react in the right way. I remember doing a little dance when I saw my Netflix investment go up by $20k, then feeling sick to my stomach when it dropped by $35k the next day. Then feeling anger 6 months later when I was no longer doing it and randomly saw the stock price up by 30%. How’s that for a rollercoaster of emotions? And that was just one of my stocks…soooo yeah, I wasn’t very good at it. What made it even more frustrating was that I was studying Finance and had a pretty good handle on how the market works and how to value companies. It really opened my eyes to how finicky the stock market is and that if the top investment banking companies, who are pumping billions of dollars into the stock market trying to figure out how to get the best return, haven’t gotten the market cornered, odds are some funny-looking schlub who writes a personal finance blog is at least one step behind them. Well, maybe two.
The craziest thing about it was that even though it wasn’t my money, or even real money for that matter, I was emotionally tied to the gains and the losses. It didn’t help that 85% of the class was doing better than I was. Although it turns out a lot of them benefited from a glitch in the program, so I wasn’t doing too bad. I still lost money though, and I had to purposefully detach myself from it emotionally before it started to give me ulcers.
So before you start thinking about getting into the stock market, ask yourself this: Are you emotionally ready? Or can you leave the emotions out of it? Before you start putting money into the stock market, try a virtual stock exchange. It’s actually kind of fun, until you start sucking it up haha. Become familiar with how it all works and get to know the companies you are investing your fake money in. I think it will end up being a good wake-up call and you’ll realize that it takes a lot more than blind luck or going with your favorite brands to really succeed. You’ll learn that knee-jerk reactions end up hurting you more than they help.
If I were you, I wouldn’t even consider putting any money in the stock market (outside of retirement accounts, of course) unless you have a solid emergency fund with 3-6 months worth of expenses and you’re socking away a lot into your retirement accounts. Don’t waste your time and money playing around if you don’t have those other things on autopilot already. Making sure your risks are managed (e-fund) and you’re accumulating wealth (retirement) are the foundations of your financial plan. Skip them and you’ll be sorry. And if you do end up getting to the point where you can do it, hooray for you! Do your homework and cut the emotions out of the equation, and who knows? You could end up being the next Warren Buffet 🙂