“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffett
It seems to me that a lot of people are becoming greedy. As the S&P 500 nears all time highs (amidst a global pandemic and millions of jobs and revenue lost), I’ve received more questions than ever over the past month from people asking me what I think about “X” individual stock or crypto currency. This is something that I wrote about in my last blog post but that I believe deserves another quick post – especially given how many people have asked me these types of questions over the past month.
You need to give yourself permission to play. You need to build a foundation first.
Give Yourself Permission To Play
If AT LEAST 15% of your gross income isn’t going towards increasing your net worth through saving for retirement, then you shouldn’t even be considering speculating in individual stocks or crypto currency.
If you have high interest rate debt, then you should not be considering speculating in individual stocks or crypto currency.
Your financial house has foundation issues that need to be fixed before you start building an entertainment room.
Fix the foundation and then you can play.
It’s kind of like your financial house is about to collapse on itself because you haven’t done the necessary foundation work but you’re focusing your attention on building out a game room anyways.
When the house collapses the game room is going to seem like a silly idea. Fixing the foundation first gives you permission to play.
Financial Foundation
Below are the factors that I believe make up a solid financial foundation. If you have all of these in place, then feel free to play with your extra disposable income. The key is making sure that the foundation is in place first and that the money that you’re going to play with isn’t a part of that foundation:
- 3-6 months of expenses in an emergency fund
- Proper insurance policies and coverages in place
- No high interest rate debt (You should not be playing with individual securities if you still have high interest rate debt)
- Applying at least 15% of gross income towards saving for retirement
- A well-diversified portfolio consisting of ETFs and/or mutual funds
These are the minimum requirements. There are plenty of other things that you can do to create an even stronger foundation beyond those listed above. Here’s a list of things that you can do to help fortify your financial house (the first 4 on this list may not apply): 30 Days Of Stay-At-Home Personal Finance Wins
Who Is Influencing You?
Most people need to practice financial distancing. Influencers, financial TV shows, and gurus aren’t there to provide you with personal financial advice. They’re there to entertain you and to keep your attention. Granted, there are plenty of influencers, bloggers, podcasters, etc. who provide great financial education (that’s my goal), but they can’t provide individual advice without having in-depth knowledge of your own unique situation.
Be cautious about what information you trust when it comes to someone touting the returns that they’ve made on an individual stock, crypto investment, or anything else. Often, people will share their winning picks with you and show you how great they’ve done, but most people who are trying to show off their success won’t be so forthcoming with their failures.
Most active mutual fund managers don’t beat their benchmarks. These are the smartest, most well-educated people in their field who have the latest and greatest research and tools available to them. If they’re not able to beat their benchmarks, then what makes us think that we can? What makes us think that someone without a deep understanding of financial securities and markets will be able to do so on a consistent basis?
You may pick a couple of winners but, unfortunately, the data shows that your losers will likely wipe away all of those gains plus some.
Build The Foundation, Then The Game Room
Focus on building and maintaining your foundation. Without it your house will fall in on itself. Once you have a solid and sustainable foundation in place, then you can start on the game room.
