The idea of investing can be intoxicating, especially when the market is doing well enough to make headlines and become a part of everyday conversations. Unfortunately, I have seen far too many driven away by poor short-term performance in the stock market because they were not prepared to see their account value fall during any given period. No one likes losing money. There is also the problem where people are lured into investing for the purpose of funding short term expenses.
I believe that before becoming an active investor, one has to be prepared to see his account value fluctuate and this is to be expected even more during volatile market periods. For this reason, the priority is to establish a financial structure that allows for investments money to be kept apart from the money needed for emergencies and daily affairs. We should not regard investing in the stock market as a source of funds for near term expenses. The stock market rarely does what anyone expects, and therefore, we should not make concrete plans based on any instrument that typically provides unpredictable short-term results.
We should also have an idea of how to do basic assessment of the companies we are invested in, so as to understand the risks. This doesn’t have to be a complicated process and one of the best places to start is by understanding our personal finances and expanding from there. If we cannot look at our own income and expenses and detect any problem, then we cannot expect to detect issues when looking at more complicated statements.
I believe that in the initial stages, stock market investing should be a small percentage of our savings, with the hope that over time, the performance of our investments may eclipse our other efforts to save. But even if that doesn’t occur, we would remain standing on a firm financial foundation.