How (not) to start investing

A few months after graduating from college, I was living the dream for a 22-year-old with a liberal arts degree in hand. I had a steady day job with a nonprofit, an ultra-cheap shared living situation, and I was getting regular singing work to boot. Before long I had accumulated a few extra dollars in the old bank account that I wanted to do something more with. Along with that restlessness came an inflated sense of my ability to take risks in order to achieve a big payoff. I was ready, in my head, to play the stock market.

I talked to my grandfather, who has been trading his own stocks for decades, and he gave me the names of three or four companies that he liked. Plunk went my hard-earned savings into my new brokerage account, and just like that – without the least bit of thought about my own goals or needs, nor any kind of long-term strategy – I was an investor. It was the spring of 2008.

By that fall I had worked up the nerve to quit my stable, good-paying day job to focus on a full-time career as an opera singer. As luck would have it, the global financial crisis hit right around that time. My investments were suddenly worth less than half of what I had put into them. Needing cash to live on and afraid of losing any more, I sold off those shares that I had bought into just six months earlier, locking in a big fat loss (for a 23-year-old) at the very bottom of the stock market crash.

The market had played me like a fiddle. It was a perfect microcosm of the classic greed-and-fear cycle that drives so many people to buy into the market when prices are up and sell when they go down. But even after selling out, I still couldn’t wait to get back in, thinking that if I looked harder I would surely find the lottery-ticket stock that would vault me to riches. Needless to say, I didn’t fare any better the next time around. I’ll close the curtain on this scene in my life with the image of me sitting in my apartment surrounded by copies of investment newspapers, poring over charts and statistics I had no clue how to interpret and telling myself, one of these companies has got to be the one. Right?

A fair number of other people in their 20’s and 30’s ask me now: How do I start investing? When they do, I inevitably think back to those days and the lessons that I learned that became the seeds of my career in financial planning.

As a 23-year-old with the ink still wet on my diploma (in music, no less), there was no way I could have have possibly understood the housing bubble, bad debt, derivatives, and all the other factors that would lead to the global financial crisis. Very few people did. But, as I’ve realized since then, it was a much more avoidable lack of introspection that led to my own financial crisis. I had just one aim at the time – to make money appear for me in the stock market – and once the crash blew up that goal, there was no greater strategy to fall back on. What’s more, I never acknowledged that I might be needing the money in the near-term, which turned out to matter when it came to how much risk I was able to take on. My strategy, such as it was, was completely mismatched with even the sketchy, underdeveloped goals that I had, as well as with the turbulent reality of my own financial situation.

So what can a new investor learn today from my own less-than-ideal debut performance? For one thing, you need to know a little bit about the financial markets before you invest in them, but more importantly, you need to know a whole lot about yourself.

People react in many different ways to the uncertainty of investing. Some are extremely methodical, hesitant to take action, and may need to be prodded into taking more risk to help them achieve their long-term goals. Others are gamblers, always ready to spin the wheel one more time, and may need help to dial back those instincts and stay focused on a strategy for the long run. Some people are perfectly comfortable sitting back and letting a plan play itself out, while others need to be strapped like Odysseus to the ship’s mast to keep themselves from constantly meddling. Being able to see yourself honestly and recognize these characteristics in yourself can significantly affect the outcome of your plan, regardless of the performance of the investments themselves.

When people ask me how to get started with investing, I advise them to take a step back and examine their own goals, both in the short- and long-term, and how investing would help to achieve them. Then I give them some questions that anyone starting out in investing should be able to answer honestly for themselves:

How comfortable am I with uncertainty?

What will my reaction be if my accounts drop in value? How about if they rise?

How likely am I to take some action based on news reports or events in the outside word?

Am I comfortable with following someone else’s recommendations or would I rather go by my own instincts?

Your investment strategy might come from from a human adviser, an automated online service like Betterment, or just the result of an afternoon of Googling. (Full disclosure: I am a human investment adviser.) These days you can go from having a checking account and no clue to a fully-implemented long-term investment strategy in less time than it takes to binge-watch a season of House of Cards. But once you choose a strategy, you also have the power to pull the plug on it at any time: After all, it’s your money and ultimately your decision to stay with a strategy or not. So you must have confidence in both your strategy and yourself in order to stick with it in both up and down markets and only make changes when it is appropriate based on your own goals and needs.

Investing can be a powerful way to grow your savings over a long period of time. Having a sound strategy is important, but sticking to that strategy requires being prepared not only for the inevitable highs and lows but also for your own gut-level reactions to those fluctuations. The more you can understand this before investing your first dollar, the more empowered you will be to save and invest confidently.