Every time I get to speak to a person about my book, I share two caveats. I thought it would be helpful to put them in writing, so I can share a link to this page instead.
These two caveats are:
- The “best” way to get started investing fallacy
- The book’s ‘Chapter 4’ (the tactical how-to to make your first investment)
Caveat 1: Getting Started Investing
When you get started investing you’re doing three things:
- Building wealth
- Learning about investing
- Trying to figure out how to stay motivated
It’s “common guidance” that people getting started should buy a low-fee index fund, setup automatic deposits, and forget about it.
I agree in principle with this idea, but in practice not so much. At least, not exclusively.
If I purchase I stock I pay a commission once, even if I hold it for 10 years, while a low-fee index fund charges me that same low-fee every single year. So, the idea of low-fee being better for long term holdings is disingenuous.
The counter argument by the way is that an index fund reduces risk, and it’s a good argument which is why I think a low-fee fund is a good way to start, but not the only thing investors should start doing.
Back to the Point
I don’t like this idea of “forget about it” or “don’t look at your statements” as a way to manage your investing anxiety.
A better way of managing anxiety is changing your story by changing your perspective AND then using your new perspective to develop a confidence about investing that will serve you for decades. I think this confidence-building and perspective-changing are related. After all, if you don’t change your perspective and instead act like a professional trader, of course you’re not going to develop mastery (unless you are a professional trader and are good at what you do).
Let’s break this down into three elements:
As I was writing, I thought of a metaphor along the lines of “teach a person to fish, rather than giving them fish.”
Let’s say you go fishing. Within a few minutes of getting out there, you hook a fish. And another. “Great!” you think. And, you’d be right. Great. But unrealistic.
At some point the fish won’t bite. At some point the sea will kick up. As some point, it might even rain. Fishing isn’t much fun… though as the saying goes, it’s still better than a day at work.
That’s your perspective. If you can learn to love the sway of the boat, or the feeling of sun on your face, then even if you go fishing but don’t catch anything, you’re going to keep fishing. But in the finance world equivalent, people will shout that learning to love the sun or the fact that you have no phone signal has nothing to do with being better at fishing.Learning to love the sway of the boat or the feel of the sun on your face has nothing to do with fishing and everything to do with investing. Click To Tweet
Why don’t people invest? There are probably a few reasons, but one is definitely that it goes against our nature to keep doing things that don’t earn a reward. And, with investing there are times when the market is down.
How many months will you go, continuously putting money in as each month you look and see you have less than the start of the month?
So, people respond by saying, invest automatically and don’t look.
They solve the motivation problem by not looking.
I don’t know, anytime I’m told not to look at something, not only do I look, but it stays on my mind creating anxiety (or anticipation).
Why not find something else to measure, something that doesn’t provoke anxiety?
The Power of Habit is great for understanding the psychology of motivation. Simply, it defines habit forming behavior as cue, habit, reward. The reward is critical, and that’s why people can’t be motivated to invest without dipping into their reservoir of will when their investments are going down. It takes energy to work against this habit, energy many of us don’t have.
In The Elephant in the Room has a Paycheck, instead of focusing on the ‘pile of money’ I focus on the ‘paycheck’ that money generates though dividends.
Management tries to avoid dividend cuts, and we can make them more rare by investing in dividend aristocrats. Looking at your total paycheck means that regardless of “how the market is doing” with each investment (and dividend reinvestment, and dividend raise) your paycheck goes up.
Your rising paycheck is the reward that reinforces the habit.
With the paycheck you have external motivation to participate in building wealth, which means you might be curious. Which means you can look. By looking, you will learn.
Learning more, especially when you’re young, will build a lifetime habit of evaluating your wealth and investing habits through each life stage, asking for help when necessary and feeling mastery around the topic because you’ve been looking, and you’ve learned.
So, with The Elephant in the Room has a Paycheck you have a positive motivator (actually more than one — because you can track the Raise as well, and the raise is surprisingly high — who doesn’t like raises?), learn as you go, and develop a mastery about financial terms so that you set yourself up for long-term wealth accumulation through each life-stage.
Caveat 2: The Tactical How-To
When I wrote the book, Stockpile didn’t exist.
Stockpile, among other cool things, allows investors to get started with just $5 (you can even get a $5 bonus for new accounts if you use this link). Investors can choose from any of over 1,000 stocks or ETFs. Getting started is as simple as filling out an online form.
I wanted to make sure that readers not only had a plan for investing, but had a step-by-step guide to get started. Which means I needed to suggest a method for buying stocks.
Without Stockpile, I focused on an “old school” way of buying stocks directly from companies. Buying stocks directly still works, but (big but!) there is usually a minimum of $250 to get started, there’s a lot more friction as you often have to fill out a form and mail it in, and the websites are generally poor quality. Not to mention that for each company in which you wish to invest you’d have to go to their website, and figure out what their “version” of the rules/fees are.
Here’s a quick summary:
Buy Shares with Stockpile:
- Minimum investment to get started: $5
- Minimum additional investment: $5
- Friction: Low, completely online setup
- Investment selection: Simple, one site for over 1,000 investment choices
- Web/App investor experience: Amazing
Buy Shares Direct from Company:
- Minimum investment to get started: $250 or more (generally)
- Minimum additional investment: $25, $50, or more (generally)
- Friction: High, even those with digital processes simply emulate paper processes
- Investment selection: Complex, each company has their own direct purchase rules, and if you invest in multiple companies you could end up with multiple websites to use to manage your portfolio
- Web/App investor experience: In my experience, the websites are ugly, complex, and have poor mobile app solutions
It goes without saying that if I were to rewrite Chapter Four, I’d recommend Stockpile rather than direct stock purchases.
And of course if you have a brokerage you prefer to use, you’d want to make sure you can reinvest dividends (Robinhood, for example, does not). Additionally, traditional brokerages have higher commissions that Stockpile (and Robinhood of course!) and you have to buy an exact number of shares, instead of Stockpile’s approach allowing investors to purchase fractional shares. Meaning, if you’re just getting started with a modest amount of money to invest, Stockpile is a better option than a traditional brokerage. However, if you’ve already bought some shares you can simply turn on “reinvest dividends” and begin your Elephant’s Paycheck Blueprint.
Free Email Course
If you’re not committed enough to spend $20 on a book, even though it’s beautifully printed, you can always sign up for my free email course which covers a lot of the same material (and does reference Stockpile instead of Direct Purchase Plans).
Give it a try?
Money Making Money
I wrote a free email course specifically for people who want to get started investing. In it, I will teach you how to get started with as little as $10 using Stockpile, and then walk you through my unique metrics designed for you to have fun and stay motivated to build a healthy investing habit.
Course attendees can download a spreadsheet template that I’ve created to highlight these metrics. I even share a tutorial that you can use to setup your own tracker.