Got asked by a friend about how he should start in the sharemarket. I know that there are probably hundreds of books out there that answer this question but instead of pointing him to a book I thought about it and gave him my version (although a bit more fleshed out now that it is written of course). I thought of sharing it here for other new enthusiasts. To avoid having to write "investing/trading", I will use "investing" alone but everything should apply to trading as well.
To enable a fruitful investing career, you must know how to spend less than you earn. Select a reasonable percentage of your income, say 10%, and as soon as your pay packet comes in move this amount to a high-earning savings account. For those who still live with mum and dad, try to go for 25% to 40%, as this is the most opportune time for you to save since you do not have a lot of fixed expenses yet (rent/mortgage, utility bills, etc). Once you are used to a life of spending less than you earn, you will eventually have enough capital saved up to start your investing career.
2. Keep Investment Funds for Investing
Got enough to start your investing? Great. Now don't go out and buy the latest hot tip yet. First you must make a commitment to yourself that the money you have allocated for Investment is for Investment alone. Open a new investment account with your financial organization to keep it seperate from your day-to-day account. You must promise yourself that this money is for investment only and not an emergency fund for an engagement ring or a holiday in Bali. By doing this, not only can you accurately track your progress, you can also ensure that you will get the full benefits of compounding.
3. Determine an End
When planning a long drive, you first determine where you are going before you plan out how to get there. Investing is no different. Decide where you want to be, and when you want to get there. Write it down and keep it in plain sight so you never forget. Don't just say "I want to be a millionaire". You must say something like, "I want to be a millionaire by March 1, 2015". Envision yourself achieving your goal, how your life would be like and what you might be doing at the time.
4. Learn, Learn, Learn
Before you set out on your long drive, you must know your car well. You must know what to check and when, what problems might arise and how to overcome them. You will probably also want to know about the weather forecasts, what you might encounter on the roads, and where the petrol stations are. With investing, you need to continue to educate yourself on what's out there, what the risks are and how to manage them, and how to use the various tools and methods. New tools and strategies are born constantly (ie CFD's) and the only way you can keep up with everything is to accept that you must be continuously learning. What are the disaster scenarios and what must you do to if they do happen? Read the classics by Graham and Fisher to start you off on a solid foundation. Read Market Wizards or Reminiscences of a Stock Operator if that is more to your liking. Try Rich Dad Poor Dad or even property books by Jan Somers. Learn to like reading the AFR (may take some time but you'll get used to it). Find a mentor you respect and who you wish to emulate and try to talk to him regularly.
5. Map out your Plan
Once you know where you are headed, you can start fleshing out how to get there. What do you need to do on a yearly/monthly/weekly/daily basis to get there? If you were driving from Sydney to Melbourne and you wanted to get there as soon as possible, you would probably think of driving non-stop for 10 hours. Or you could plan for 3 hour stretches with half hour breaks in between and still get there within a day. Perhaps you wanted to see the sites and plan to travel 5 hours a day over two days. The point is that since you already know where you are going, you can then figure out how to get there, whether you throw caution to the wind or go slowly but surely or perhaps, more realistically, somewhere in between.
Procrastination is often our biggest enemy. There will always be a reason not to start now. The market is nearing a top, or the market is falling and has not hit bottom. It could be interest rates, the economy, house prices, etc. You may have prepared yourself adequately for your investment journey but without taking that first step you will never get anywhere. Do not be afraid to lose money -- it is part of the journey. You have a plan, execute it! Plan dictates Action.
To ensure you get to your desired destination, don't forget to take some time to review your progress. Have you been doing enough to be on schedule? Is the plan working? Have you been faithful to your plan, or have you been taking side trips from time to time? Do you need to catch up? If so, how? Does the plan need updating?
8. and lastly...Keep on Keeping On
There will be days when you will feel like nothing is going your way. You may feel like all your hard work is yielding very little rewards. Don't worry, most people go through periods of self-doubt as well. The key to overcoming this and to get to where you are going is to just keep on keeping on. I remember Warren Buffet once said that to get to a million simply start with a dollar and double 20 times. Say it takes you a year to double your money. In the first 5 years you will go from $1 to $32, not very flash and certainly to make only $31 in 5 years seems like a lot of effort for nothing. The next 5 years are slightly better but still nothing to scream about when you get to a thousand. Year 11 to 15 gets much more interesting, as you get to $32k in Year 15. But see how much it then pays off from Year 16 to 20:
Yr 16: $64K
Yr 17: $128K
Yr 18: $256K
Yr 19: $512K
Yr 20: $1,000,000
So really, if you give up within the first 10 years, how can you expect to get to the serious money?
There you have it. Probably lacking some things but that is certainly the gist of it. Add, subtract or modify, your thoughts are welcome