Overview – Making the Jump From Observer to Investor
In investing, many people hope to one day make the transition from simply being a spectator to actually being involved as an active investor. I know I certainly felt that way before I started my investing career.
However, after becoming a new investor, you may quickly find out that theory and reality are two very different things. No amount of reading or study can fully prepare you for the realities of investing – there are some things you will only learn once you actually start investing.
For many people, becoming a first-time investor comes with its fair share of unexpected challenges. However, just because the gap between an observer and an investor is large doesn’t mean a new investor needs to hit the ground running.
Thankfully, there are some ways to help individuals ease into their new lives as investors. It’s tempting to move as fast as possible, but knowing where you’re going is far more important than how fast you go – this is especially true in investing.
When It’s Time to Take the Leap, Take It
One of the hardest questions every investor-to-be needs to answer is “when is it time to take the leap?“
I’ve addressed this question before in the articles The Stages of Investor Learning and Investment Education Goes Beyond Just Reading. Because this can’t be repeated enough, I’ll say it again here: There will never be a “perfect” time to start investing – when your gut tells you it’s time to take the leap and become a new investor, then take it.
Now, there are valid reasons why an individual may want to put off investing for now – I discussed those reasons in this article. If you have a valid reason not to start investing right now, then don’t. One of the worst things a person can do is pursue a new endeavour when they know for a fact they aren’t yet ready.
However, there’s a difference between not being ready and talking yourself out from taking the leap.
It’s very easy to convince yourself that you’re not ready and go back to reading more investment books or watching more videos, but past a certain point, you’re not helping yourself by acquiring more investment knowledge.
Let me make this very clear: as an investor, you’ll never know everything. If your plan is to start investing after learning just a bit more, then you’ll never start because there will always be new things to learn.
You can study investing as much as your heart desires, but at the end of the day you still need to make the leap, and no amount of study will make the leap any easier.
No Need to Hit the Ground Running
After making the leap from observer to investor, congratulations! You have officially cleared the biggest hurdle.
One of the things new investors can quickly forget is that they have full control over their pace. If you’ve just started investing, there’s no reason whatsoever to hastily put together your investment portfolio.
Starting out in investing can be overwhelming at times. I know I certainly felt that way when I first started out – there were so many things that I wanted to do, but at the same time, I knew that my level of responsibility has dramatically increased, so being too hasty wasn’t the best idea.
Taking quick, decisive action in investing is important, yes, but it’s just as important to know when to take things slow. Moving quickly should never be interpreted as making lots of progress – it’s possible to go nowhere very quickly.
Some Ways to Ease Into Investing
At the start, many investors are tempted to move as fast as possible. I certainly felt that way when I started – nothing brought a bigger smile to my face than seeing my portfolio grow, both in market value and in my number of holdings.
However, just because you’ve now started investing doesn’t mean you’re in for a major shock. It’s possible to make the transition into investing without feeling overwhelmed.
As a new investor, I found that the following methods were very effective at helping me maintain a level head and prevented me from becoming overly hasty.
1.) Make One Decision at a Time
As a new investor, you quickly learn that there are many decisions you’ll need to make. Given the thrill of investing for the first time, it’s tempting to convince yourself that you can address all these decisions simultaneously.
It’s well understood in psychology that humans can’t multitask. What people consider as “multitasking” is really just them bouncing between tasks – this is not the same as doing multiple tasks concurrently.
Similarly, you can’t expect to make multiple decisions at once. In reality, you’re just dividing your attention between multiple decisions and bouncing between them.
Investors make decisions all the time, and the last thing they want is to make a rushed decision. One high-quality decision that took time to reach is worth more than ten rushed ones.
A rushed decision usually means there are some errors that were overlooked, meaning these errors need to be addressed in the future, costing you more time and energy had you simply made a good decision right from the start.
So, instead of trying to make multiple decisions at the same time, address each decision one by one.
By making one decision at a time, you force yourself to slow down and really think about the potential outcomes, both good and bad. Not only that but this approach also helps you develop your decision-making framework. In time, you’ll be able to make high-quality decisions a lot faster because you’ve streamlined your decision-making process.
Like all things, speed comes with time and consistent practice. As a new investor, it may be frustrating to make decisions so slowly, but quality will always take precedence over speed.
2.) Build up Your Holdings Slowly
With capital at your disposal ready to be deployed, it’s tempting to build up your holdings as quickly as possible. If you have $5,000 on hand, as a new investor you probably want to deploy that money as quickly as possible.
However, the reality is that it takes time to build a portfolio. You can’t expect to slap together a world-class portfolio in 10 minutes.
For example, here are Berkshire Hathaway’s (and by extension, Warren Buffett’s) current holdings. Mr. Buffett didn’t assemble this portfolio in a single day – this portfolio is the result of decades of planning, analysis, re-adjustments, and hard work.
The reason it takes so long to assemble your portfolio is that finding excellent investment opportunities is a lot easier said than done.
This is yet another example of the disconnect between theory and reality – excellent investment opportunities take time and effort to uncover. Excellent investment opportunities aren’t as readily available as some investment books, videos or articles would have you believe.
Sure, you can research which assets you want to purchase before you start investing, but you run the risk of telling yourself you’ll start investing once you’ve done a “perfect” analysis – just as there’s no such thing as the perfect time to start investing, there’s no such thing as a “perfect” analysis either.
When I was a new investor, the approach that I found to be effective was to add holdings to my portfolio one at a time. That meant going through prospects one by one, then making decisions one at a time – this ties in with what I said previously.
By doing this, I accomplished two things. First, I was able to build my confidence in my analytical ability as a new investor. Second, by doing this I could control the quality of my portfolio – the likelihood of a bad investment ending up in my portfolio was greatly reduced because I assessed every prospect one at a time.
Again, the priority here is quality over speed. By building up your holdings slowly, not only do you get the hang of managing your own portfolio but you greatly reduce the likelihood of dealing with bad investments later on.
3.) Ask Yourself “Do I Seriously Need to Add This to My Portfolio?”
When I first started investing, one of the major mistakes I made was convincing myself that every prospective investment I come across could find a place in my portfolio.
Whenever I came across a prospective stock, I’d subconsciously convince myself that I needed to add this to my portfolio for the sake of diversification.
Every investor is probably familiar with the diversification vs. concentration debate. In my opinion, every investor, new and experienced, should have a very clear idea of where they stand in this debate.
I’ve previously looked at this debate, and my stance is that I prefer portfolio concentration. My big mistake was that I didn’t establish this position right away.
As a result, I fell into the trap of telling myself that I could purchase any stock I came across for the sake of “diversification” even if the stock in question didn’t offer much in terms of investment merit.
Regardless of your stance in this never-ending debate, as a new investor, you need to stop and ask yourself if a prospective investment you’re looking at seriously has a place in your portfolio.
One of the worst things you can do as a new investor is to go on an unhinged buying spree. This is because you run the risk of adding a low-quality holding to your portfolio, which could lead to some bigger headaches down the road.
Whenever a prospect catches your attention, take a step back and assess what this prospect brings to the table. If you feel that it’s a good fit in your portfolio and will help you achieve certain goals, great. If not, you’re better off moving on.
As a new investor, you need to develop the mindset that not every prospect you come across will benefit you nor will they advance your investment goals.
When in Doubt as a New Investor, Take Things Slow
A struggle every investor faces, regardless of their experience, is trying to strike the balance between quality and speed.
Inevitably, you will come across situations where you’ll need to decide between quality or speed. When faced with this dilemma, which choice should you go with?
My experience has taught me that in these situations, it’s better to err on the side of quality. Sure, you may delay your plans or run the risk of making a decision too late, but by choosing quality over speed you reduce to possibility of needing to go back one day and fix the mistakes of choosing to go fast.
It’s no secret that our society values speed over anything: faster computers, faster phones, faster transportation, faster fast food – we’ve effectively conflated “progress” and “speed”.
As a new investor, you must resist the urge of succumbing to this societal norm. In investing, quality decisions and a clear sense of direction are far more important than speed. Investing isn’t some competition where the fastest investor wins, so what’s the rush?
In the words of Shigeru Miyamoto, a Japanese video game developer credited for developing the critically acclaimed Mario and The Legend of Zelda franchises:
“A delayed game is eventually good, but a rushed game is forever bad.”
So, the next time you need a bit more time to make a decision or to polish up some investment analysis, take the extra time. Getting it right the first time will save you lots of time, energy, and money down the road.
Wrapping Up
Starting your investing journey may be overwhelming at times, but it’s important to remember that you retain full control of your actions. There’s no need to hit the ground running as a new investor. Fortunately, there are some practical ways to help a new investor slow down and ease into investing.
When in doubt, quality should take precedence over speed. Taking the time to get something right the first time may take a bit longer, but saves you from the hassle of one day needing to go back and deal with the consequences of rushing.
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