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The 4 Stages of Investing and How to Win Long Term

I’ve been investing now for almost 20 years and have experienced various stages of investing during that time. My wife brought several mutual funds into our marriage and that became my first exposure to the stock market. It didn’t take long for me to see how investing could have a positive impact on our financial future.

the 4 stages of investingOver the years our investments have evolved and our assets have grown. We’ve branched out into other avenues of investing beyond the stock market. It took some time to get there but the results have been worth it.

Making money in the market is a journey. You’ll go through various stages of investing along the way that are marked by specific decisions. How you handle each one of these stages will determine your ability to win long-term.

The 4 Stages of Investing

I hope you are thinking about investing. Next to the personal earnings you receive from your job, investing is the #1 way to build wealth. It does take some time for significant wealth to accumulate and you’ll have to go through these stages of investing to get there:

Stage #1: Preparation

The preparation stage will be the hardest stage for you to work through because you have so much to overcome just to be ready to invest. Yes, you read that right. Not everyone should be investing immediately. You have to lay the groundwork first.

That means you should have adequate savings on hand, specifically a fully-funded emergency fund.

You should also be out of consumer debt, having paid off all credit cards and school loans.

Once both of those things occur your ready to invest but only if you understand the concept of investing. That means you’ll have to read up on why you should invest and where the best places are to put your money.

You have to gain some knowledge through your own reading and study. You can mess investing up by making mistakes…that’s why you have to go into it with your eyes wide open.

Take your time in the preparation stage to get all your ducks in a row. Don’t rush into investing before your financially ready or before you know what you are doing.

Stage #2: Initiation

I refer to stage #2 as the “Initiation Phase” because you finally are ready to make the first investments. You’ve done all the preparation that is necessary to lay a solid financial foundation and you feel comfortable enough from your research to begin the process.

During the initiation phase you’ll have to decide where your investing dollars will go. The safest place for a beginning investor will be in an index or mutual fund that tracks the broader market (such as an S&P 500 Index Fund or a Total Stock Market Index Fund). You’ll want to avoid single stocks, as the risk on your money in the beginning stages of investing is too great.

You’ll also have to decide the avenue by which you’ll invest. Will you be doing this on your own by opening an investing account and trading with an online broker? Will you be using a retirement vehicle like your employer’s 401(k) plan? Or perhaps a Roth IRA?

Each has benefits and restrictions so it’s important to understand the differences before you make a move.

Stage #3: Diversification

Diversification simply means to spread around. You place money in different places so that if one area or fund falters you don’t lose all your money.

When you placed your money in an index or mutual fund in stage #2 you gained instant diversification. Funds are made up of many stocks and all the stocks in the fund help balance one another out. If the price of one stock in the fund has a bad quarter the total fund price is supported by the other stocks in the fund that aren’t doing poorly.

In stage #3 you’ll look to explore other stocks investments beyond the basic funds of stage #2. Here you’ll want to diversify into funds that track small and mid-cap stocks. International stock funds should also be on your radar. You might even consider looking at some bond funds that will provide some stability and regular income to your portfolio.

It may take some time to get to Stage 3. However, it could happen concurrently with stage two depending on your comfort level with moving into additional asset classes.

Stage #4: Exploration

You can’t enter stage 4 you’ve built up some wealth from investing. You’ll need to feel secure in your level of wealth to pursue opportunities here.

In this phase you’ll look for alternative investments outside the traditional means of investing in stock funds. You might purchase a few single stocks to boost your portfolio. You could venture into commodity investing or even real estate. There may be business opportunities or start-up companies in which you could invest venture capital money.

The exploration phase is the last one you’ll work through. And work through it you will. The exploration phase lasts the rest of your life as you continue to search for ways to build wealth.

But is it necessary to actually get to this stage? Not really. You could do just fine investing in solid, growth stock mutual funds that have you adequately diversified. Stage #3 is your real target to shoot for. Stage #4 is gravy if you make it that far.

How to Win Long Term

There are three things you can do as you move through the stages of investing to enhance your ability to win long term. Please keep in mind, it’s not a guarantee that you will. Investing in the stock market can be a challenging proposition at times. The market flows up and down and your success will be based more on what the market is doing than on what you are doing.

With that said, these three practices will facilitate a positive experience with investing:

1. Avoid unnecessary risk. All investing has risk. But some risks are too high. Investing $5,000 in a start-up company when you are a millionaire isn’t risky. It’s way risky if it’s your first ever investment.

Keep investing simple and avoid risks that might cause a setback.

2. Conquer your emotions. Investing is a great asset-building tool, but it can be an emotional roller-coaster if you let it. The market is either up or down everyday…sometimes up or down for countless days back-to-back.

It’s easy to get greedy as the market goes up and fearful as the market goes down. If your going to invest you have to realize these trends are part of the game and just flow with it. You can’t be chasing returns by buying or selling because you are fearful you might miss out on a rally or lose your money in a downtrend.

3. Stay the course. I’m an investor for the long haul. I’m interested in how my investing will project 20-30 years from now. The day-to-day action of the market doesn’t interest me. So I never invest money that I think I’ll need in the next five years.

People who win stay the course. They continue to invest month in and month out, year after year. This allows them to build assets as they continue to put money into the market. Imagine how much money you could accumulate in 40 years if you invested 5, 10 or 20K a year.

The answer is a lot.

Contrary to what some people out there say you can win by investing. It won’t happen overnight though. You’ll have to be disciplined with your approach and consistently stick with it even through market volatility. That’s the formula to create great wealth and reach financial freedom.

Questions: Do you believe there are stages of investing? If so, in what stage are you? How hard was it for you to initially get started…were you afraid or lacking in knowledge? Are your assets diversified enough…what else could you do? Do you find it difficult to handle your emotions when it comes to investing or your money in general?

Image courtesy of TrainingAcademy.com

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  1. Thx for sharing this!

  2. Great tips, Brian. I find #2 under How To Win Long-Term is so important and something many struggle with. It is scary when we lose money and it’s easy to make a knee-jerk decision because of it. It’s also exhilarating when you see your money grow, faster than you imagined, to take on risk you shouldn’t. People don’t always realize how much their emotional competence affects their investment success. Sometimes even more than picking the “perfect” investment.

  3. I have definitely been through all of these stages and I am thankful that I am at the point where I am comfortable with investing and know it’s best for me in the long run. Most of my clients are scared to start investing; however, I have found that when I prepare them for the emotional journey and the realities of investing, they are much better prepared and have less stress over the long run.

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