Risking it all when you are young May 6, 2014 9:33:01 GMT 7 candy188, stevenlsf, and 2 more like this
Post by oldman on May 6, 2014 9:33:01 GMT 7
When you start out in life, it is likely that you will start with a low salary. Even if you manage to save 30% of your salary every month, frankly, this is not going to make you rich. Savings alone will not make you rich. If you save every month till your retirement age, you may just have enough money to last through your retirement but you still have to be very careful with money when you retire, especially when you take into consideration, the eroding effect of inflation on your savings.
To become rich, you have to take risks. This is especially true when you are young and have the safety net of a stable job. Even if you lose all your money in your investments, you should still have a job that will pay the bills. So, your risk actually is not that high when you are gainfully employed. After all, even if you lose everything, you still have your job.
When I started off in life, I knew that savings alone will not make me rich. If you started without a penny like I did, there are basically two ways of making it rich. Firstly, your career takes off and everything then falls into place. However, careers are like pyramids.... only a selected few will make it to the top. You must either be very good in what you do or you have the gift of the gap and can play corporate politics well.
The other way of making it rich is to invest wisely and multiply your money along the way. Many of us have these 2 avenues of making it rich in our lives. Of course, the first avenue of job progression is the smoothest way of becoming rich but not many of us will be that lucky. Hence, all of us should not just bet on this one way. Instead, we owe it to ourselves to create other opportunities to becoming wealthy.
When I was younger, I put all my savings into investments. I usually do not have extra cash floating around. When your money is small, you have to multiply it to bring you to the next level. If you continue putting a few hundred dollars a month into your bank account, it is true that you should have a few thousand dollars in a few years time. But a few thousand dollars is not going to make you rich. You need to be able to multiple this amount to become tens of thousands or more.
All of us have to think of our own ways of making wealth beyond that of our jobs. Don't get me wrong. I still placed a lot of focus on my job then as I too hoped that I will be able to make it to the top of my professional. But I don't want to put all my eggs in just this basket. I wanted to also try to create wealth outside of my profession.
And this was how I stumbled upon investing. I made lots of mistakes when I was a young investor. This was how I learnt. It was painful when you lose money in the stock market as I had very little spare cash. But, I had a stable job and I used this job to fund my investments as well as my daily living expenses. Believe me, when you push yourself to a corner, you will learn much faster.
When I was running ShareInvestor, many investors were skeptical that fundamental investing can multiply your capital within a few years. So, I set up 2 showcase margin accounts. The reason I used margin accounts is because all the transactions would have been documented by the broking company. I opened 2 margin accounts because a few months after opening the first account, someone commented that it was harder to grow $100,000 than to grow $10,000. I wanted to show that person that in the stock market, having more money makes it easier and not harder to multiply your capital.
For the first account, I started with $10,000 and the other which I opened a year later, with $100,000. Within 4 years, the first account closed with $100,000 and the second account was closed after 3 years when the capital grew to $1 mil. To be honest, I was relatively new to margin accounts then and within the first 2 months, I received a margin call on my first account and after liquidating, I only had $7K left in that account. But I learnt my lesson and soon recovered my lost capital and from that time onwards, I learned not to fully utilise the margin account. Margin is a double edged sword. Use it well and you can multiply your capital many times but use it wrongly, you can slash your starting capital very quickly indeed.
If you are wondering whether I traded a lot of stocks then, allow me to share with you that I rarely traded stocks in those margin accounts. I just made a few trades every year in those accounts. My strategy was to identified stocks that will multiply in value and I held on to these stocks tightly as the stocks continued to do well. Only when I felt that the valuations were getting ridiculous, I sold these stocks. Because I use margin to buy these stocks, my returns were even higher than if I were simply to buy these with cash. This is how I multiply my money so quickly. Yes, I took a lot of risks then which I will not take today. As your money grows, there will come a time when preservation of capital becomes more important than risking it for more money.
I know that this may seem to go against the advice of our forefathers who tell us that putting money in the bank is the best way to save money. To me, it is all a matter of timing. You see, when your money grows, there will come a time when putting a fraction of it in the bank, becomes more meaningful. If you are able to multiply your initial wealth to become tens or hundreds of thousands, it then makes sense to start putting a fraction of it into your bank account. You can then start saving for your retirement but you are now doing it from a higher base. If you are successful in your investments, you will then have more savings compared to just putting these savings directly into your bank account from your first paycheck onwards.
When you are retired as I am now, you don't have the luxury of a stable income anymore. Hence, it is important for me at this stage of my life, to always have sufficient money in my bank account. I don't use this money to invest because I cannot put this money at risk. When you are retired and no longer drawing a monthly salary, you need to set aside a sum of money that will pay for your daily expenses. Ideally, this amount should cover your entire expenses for the rest of your life. If you have extra money above this amount, then you can use these for your investments. By segmenting your money this way, you are not dependent on your investments when you retire.
I know that most retirees would not have planned their retirement this way. They will probably put most of their retirement money into investments, hoping that they can multiply their money during this period. My experience in investing is that my best investments are made when I am not under any time pressure for the investments to flourish. One cannot and should not time the market. If you are retired and need the money, it is better not to put this money at risk. If you lose any of your retirement money, it will be very difficult for you to go back into the workforce to try to recover this money. Retirement money should be put in the bank and not put at risk as you may be betting with your life.
This is why I feel that it is important to take all the risks when you are young. You don't want to take too much risks when you are old. So, risk it all when you are young. Work hard and find your pot of gold so that you can then do the things that you really want to do in life.