For the past few weeks, I’ve been watching something unfold in the investing world. And although most of it is a mystery to me, I have to talk about it today. If you’ve been following along lately, you know I’ve been spending these last couple of letters on retirement (you can catch up here, here, and here). And that makes today the perfect time to address what’s going on in the stock market. By now, you know I believe it’s never too early or too late to start saving for retirement. But first, we must know what to invest in—and when. Here’s what I mean…
AMC and GameStop For the past several weeks now, it seems like all the talk is about movie theater giant AMC Entertainment and video game retailer GameStop. They are both publicly traded companies on the U.S. stock market, which means you could purchase shares to own a piece of each business. Last month, AMC stock rose from $2/share to about $20/share. And by the end of January, GameStop was trading around $350/share… after sitting around just $4/share back in August. That means if you had invested $200 into AMC back when it was trading at $2 and sold your shares when it neared $20, you would have $2,000 right now. And if you invested $200 in GameStop back in August and sold when it was at $350, you would have turned $200 into $17,500. But I don’t say this to show how much we all could’ve made had we invested in these two companies. I say this to remind you what investing is really about.
Beliefs and Wishes Remember, investing is putting your money into something you believe will grow in value over time. In other words, over the long term. Investing isn’t some “get rich quick” thing. A lot of people have had to learn that the hard way. And many more will. Don’t let one of those people be you. There are plenty of people who put money into AMC and GameStop, hoping to get rich. Now, I can’t say that I blame them. But most of the time, investing doesn’t work that way. Investing is a part of your belief system. What I mean by that is, you invest in something you believe will be worth much more than it is now. So, buying shares in a company because its price is going up and because everyone else is doing it isn’t a belief. It’s more like a wish. This is what I mean by knowing what to invest in… Now remember, AMC is a movie theater—a place many of us are choosing not to go to anymore. After months of being shut down, Regal Cinemas closed indefinitely in October. Who’s to say AMC won’t end up the same way? GameStop’s physical stores have always made up the bulk of the company’s revenue. And for years now, more and more gamers have chosen to play their games online, instead of buying them in GameStop stores at the mall. Online streaming for TV shows, movies, and video games has soared… leaving companies like AMC and GameStop behind. So, even with the money we could’ve made recently by investing in these companies, there’s always an opportunity to lose money, too. And by the way, both AMC and GameStop share prices have already dropped more than 50% since prices soared. These aren’t companies that I can see standing the tests of time. And that makes them companies not worth investing in, no matter what everybody else might be thinking. The best way to invest is to do the opposite of what everyone else is doing and through mutual and exchange-traded funds (ETF). These funds both hold a basket of stocks (oftentimes, 35, 50, or even 1,000). Think a little bit of Apple, a little of Alphabet (Google’s parent company), a little of Amazon, a little of Johnson & Johnson, and so on. Many of these funds go for $100/share or less. So, instead of taking $1,000 to buy shares of those four companies (which wouldn’t even be enough to buy one share of Google or Amazon right now), you can buy 10 or more shares of a mutual fund/ETF that owns shares of all four—and many other companies, too. Plus, this way, you wouldn’t be risking as much of your money, either. For example, even if you could buy one share of Google for $1,000, if Google’s share price fell to $750, you’ve just lost $250—25% of your investment. But if you owned 10 shares of one mutual fund for $1,000, since Google would only be a small portion of all the stocks the fund has, you wouldn’t even notice if Google dropped 25%, because the rest of the stocks would make up for that. It’s a much safer way to invest, even if you don’t see the value of your investment growing right away.
A Time and a Place Investing should only be for growth over a long period of time. Don’t risk losing money for something that’s the talk of the town right now. This is what I mean by knowing when to invest… I know seeing potential money like $17,500 in a matter of months for basically not doing much work is tempting. But there’s a time and a place for everything. And opportunities will always be here. Only invest when you are out of debt. So, if you already have a retirement or individual investment account, that’s okay. I’m not telling you to cash them out. Leave them be. Just focus on your debt for right now (remember, that doesn’t include a mortgage). If you let your debt sit, not only will it steal from you (thanks to the interest lenders charge) and take more and more of your time to pay off, but you’re also giving up money that could help grow your investments more quickly. So, when it comes to financial freedom, this is the right order to do things:
- Save up $1,000 for an emergency.
- Pay off all your debts, except for your mortgage, from smallest to largest. (If you have a couple debts that are around the same amount, pay the one with more interest first. That would be like first paying off a $5,000 credit card balance with 24% interest, then paying off your $5,000 car note that has a 5% interest rate.)
- Save up three to six months’ worth of living expenses.
- Start investing, saving for a home/paying off the mortgage early. (This is where you invest and save or make extra payments toward your mortgage principal simultaneously.)
There are a few more steps to financial freedom. If we focus on these four first, the rest will come. But most importantly, don’t look at this list and get discouraged. Don’t think: How am I going to save $1,000 and pay my $200,000 worth of debt… and then save more? You can only do what you can do. Don’t expect to get it all done at once. You’ll get it done. But only one step at a time. Focus on one goal, and that’s it. If you’re on Step 1, don’t think you have to save $1,000. Think about getting to that first $100. Then the next $100. And keep going. Achieving financial freedom isn’t a race that’s won by hoping to win big on a stock. It’s a marathon we run that requires wise decisions, patience, perseverance, and faith.
With gratitude,
Melody C. Kerr, MS
Certified Financial Coach
P.S. Not sure where to start? You can schedule a session with me right here.
